A recent case demonstrates the potential for reformation of a Trust where a drafting error otherwise made the trust assets available for purposes of qualifying for Medicaid. The New York surrogate’s court finds clear proof of mistake in the drafting of an irrevocable inter vivos
trust and allows reformation to reflect the grantor’s intent that the
trustee be expressly precluded from invading the trust’s principal. In the Matter of Scheib (N.Y. Sur. Ct., No. 343541, Jan. 26, 2007).
D. Scheib petitioned the surrogate’s court to reform an irrevocable
trust she had established in 1996 as a Medicaid planning device. She
was concerned that a recently discovered drafting error gave the
trustee discretionary authority to use trust principal to pay for her
medical and nursing needs and to loan her money from the trust. To the
extent given, such assistance could defeat her eligibility for
Medicaid, she said, although she noted that she is not currently ill or
applying for Medicaid benefits.
petition was unopposed and the court heard evidence. Ms. Scheib’s son,
the trustee and remainderman, testified that it was his mother’s intent
to create a trust for Medicaid planning and for the trustee to lack
authority to distribute trust principal or to make loans to her from
the trust. This was buttressed by a 1995 letter written by Ms. Scheib’s
then attorney, the eventual drafter of the trust, recommending the
transfer of her real property into an irrevocable trust, coupled with a
life estate in the property, as one way to carry out her wish that the
property be shielded in case she required institutionalization.
New York Surrogate’s Court grants the reformation petition. The court
finds clear proof that when the trust was created Ms Scheib intended
only to receive income distributions and the right to live in her home
for life. The court is satisfied that the trust was intended as a
Medicaid planning device and notes that the rights of other
beneficiaries will be unaffected by the reformation.